3 disadvantages of a contract for deed.
Learn what a contract for deed entails, and the advantages and disadvantages of using one.
A contract for deed is a unique financing tool available for a buyer, typically used when purchasing property.
What are the disadvantages of a contract for deed?
There are also a few disadvantages for buyers who choose to use a contract for deed.
- Contract termination: If you fall behind on payments, the contract can be terminated and you will lose whatever equity was previously built.
- Payment loss: if the seller has a mortgage and defaults on their payments, you may lose the property even though your own payments to the seller are current.
- Funding issues: If you’re trying to sell a property using a contract for deed, the disadvantages can also pertain to the way the purchase is handled. A contract for deed typically requires only a minimal down payment, and the subsequent payments are made in installments. This can be a problem if you need immediate funds to buy another property.
Is a contract for deed a good idea?
While it is acknowledged that a contract for deed can help those who currently have poor credit or an otherwise tough lending situation, it isn’t a good idea in most cases. There are several reasons why:
- The seller retains the title. This can extend through the completion of your payment plan, which can complicate things like ownership and taxes, as well as personal security and rights.
- Maintenance gets confusing. No one is clearly designated as the keeper of the home in this type of situation. You’re in limbo — which can open the door to possible disputes or frustration.
- There’s little regulation. At least, compared to conventional consumer loans. In deed arrangements, buyers have little control over any type of recourse they might take.
- Sellers don’t have it easy. Contract for deed situations don’t just negatively impact buyers — they can also affect sellers as well. In this context, a seller could e stuck with balloon payment issues, self-managed foreclosures and murky legal recourse options.
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